Vaccines and Investing
November was an amazing month for investors. There were several reasons for the outstanding performance. First, as the month progressed there was a reduction of political uncertainty. As we head into December the most likely result from the elections on November 3 is a divided government, a welcome result for equity investors. In addition, stock prices were pushed higher by positive vaccine news and relatively strong third quarter earnings reports.
Joe Biden’s recent announcement of former Fed Chair Janet Yellen as candidate for Treasury Secretary indicates that experience is a key factor for the new administration. Yellen, a noted monetary dove, should have an excellent chance of confirmation. She would assume the positions at a critical time, with high unemployment and the expiration of critical financial relief programs.
The positive news on coronavirus vaccines has been a major catalyst for equity gains as well. Both Pftzer/BioNTech and Moderna announced Phase 3 results in November, with efficacy rates above 90% for both vaccines. These products are becoming available on a limited basis and widespread availability is expected in mid-2021. This has made the otherwise seemingly baseless hope a very possible reality.
Corporate earnings for the third quarter were better than expected, providing important fundamental support to prices. With 95 percent of the S&P 500 companies reporting, 84% announced a positive Earnings Per Share (EPS) surprise and 78% announced a revenue beat. Despite the positive trend in earnings, the forward 12-month P/E ratio of the S&P 500 is 21.7, well above the above the 5- and 10- averages. We are not optimistic that earnings will drive prices higher, at least for the first half of 2021.
Many analysts, including us, believe that investors are feeling a bit too euphoric right now. It is important you avoid a growing sense of complacency after a feel good month like November. A sobering thought JP Morgan is forecasting negative growth in the 1st Quarter of 2021, and there is a growing discussion in the industry of a double-dip recession.
After a month like November the temptation may be to load up on equities so you don’t miss the boat. However, with the recent increase in the markets now is not the time to be greedy.